Contracts with outsiders

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Contents

Required Reading

Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC, pp. .

Introduction - authority to bind the company

Where an organ (director, general meeting) of a company contracts in the name of the company, its act is the act of the company itself. However, if the company contracts through an agent, that agent acts for, and not of the company.

  • Persons acting under the express or implied authority of a company to contract in the name or on behalf of the company in the same manner as if that contract were made by a natural person: s 126.

Contractors need to be sure the organ or agent who professes to contract on behalf of a company has the necessary authority.

  • When dealing with the board - how may they be sure the purported directors have been properly appointed, that quorum requirements resolving the contract have been met, that sealed has been properly affixed, that board is acting within power?
  • When dealing with an agent - how may the contractor be sure the professing agent has been authorised to act on behalf of the company by an organ which is itself properly appointed and acting within power?

These difficulties are addressed by:

  • The doctrine of actual authority
  • The doctrine of ostensible authority
  • The indoor management rule
  • Sections 128 and 129 of the Act - the entitlement to make assumptions and assumptions that can be made under s 128.

The protection and authority provided by the four bodies of rules are cumulative (ie, the absence of one species of authority will not preclude recovery upon another ground). The statutory scheme does not, however, supplant general law doctrines but provides a complementary body of agency authority

Actual authority

The doctrine of actual authority refers to those people that, by virtue of appointment to a particular corporate office such as that of managing director, secretary or sales manager, actually have an express or implied authority to act for/as the company.

  • Implied authority can be inferred by a course of dealings – ie, the company acquiesces that the person has been given authority.
  • Implied actual authority may be diminished or even negated by express limitations.
  • Implied authority of office may also be expanded by express grant, or by the conduct of the parties to the agency: Hely-Hutchinson v Brayhead Ltd
  • When determining whether someone has actual authority, consider:
    • Their position in the company,
    • Whether they have been granted express actual authority,
    • How the company conducted itself.

This was discussed in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd:[1]

  • Facts: K was a property developer. He was a director and shareholder, along with H and others, of the Defendant company. K was the man behind the Defendant, it was not expected that H would play significant part in management. For example, the Defendant had several meeting (purported to be meetings of the board of directors) without H.
    • K instructed the Plaintiff [F&L] to assist with developments of the Defendant. This was done without consulting H. The Defendant now claims that K acted without authority in contracting with the Plaintiff and thus the Defendant is not bound by the contract. The Plaintiff claims that on inference of facts, K had actual authority, and alternatively, had ostensible authority, stopping the Defendant from denying responsibility for his acts.
  • Held (Diplock LJ): an “actual” authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties.
    • If an agent enters into a contract pursuant to “actual” authority, it creates contractual rights and liabilities between the principal and the contractor. The contractor only knows what he has been told about the “actual” authority of the agent - what he relies upon is a representation of either the principal or the agent ie, a warranty of authority.

And also in Hely-Hutchinson v Brayhead Ltd :[2]

  • Facts: S was a director of company P and held substantial equity in it. In 1964, the company sought financial assistance and another company (Brayhead) acquired shares in P and put funds into it. S joined the board of Brayhead as well.
    • In following years, Mr. Richards, chair of Brayhead, urged S to put more money into P and he agreed on condition that Brayhead indemnify him from liability on a guarantee that he had given P’s indebtedness to another lender, and that Brayhead guarantee repayment of money S should lend to P. These conditions were given in letters and signed by Richards as chair, on Brayhead’s behalf, but, they were not given pursuant to board resolution.
    • P went into liquidation and S claimed the indemnity and guarantee but Brayhead denied liability alleging Richards had no authority and S, as director of Brayhead, had notice of that lack of authority.
  • Held (Lord Denning MR): actual authority may be express or implied:
    • Express: given by express words, such as when a board of directors pass a resolution which authorises two of their number to sign cheques
    • Implied: when inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director - they impliedly authorise him to do all such things as fall within the usual scope of that office
    • Office of chairman doesn't given express or implied authority to enter into contracts. However, Mr Richards in this case he had authority implied from the conduct of the parties and circumstances of the case. The Trial judge found that Mr Richards acted as de facto managing director of Brayhead. The board by their conduct over many months had acquiesced in his acting as their chief executive and committing Brayhead Ltd to contracts without the necessary of sanction from the board.

Ostensible (apparent) authority

Ostensible authority is a doctrine based on estoppel. It occurs when the company (the principal) makes a representation to a third-party (the contractor) that one of its agents has authority to contract with it (even though he does not).

  • If the principal then tries to assert that the agent had no actual authority, it is estopped based on its representation.
  • Note: the ‘representation’ can take a variety of forms, most common being conduct: Freeman.

Examples include:

  • When someone is appointed a managing director (usually also has implied actual authority, but that one could be limited to certain transactions so apparent authority covers the rest).
  • Course of dealings

The only way you can distinguish between actual and ostensible authority is to go back to the root of the two doctrines: consent or an estoppel. If it can be said that the corporation gave its consent then this is implied actual authority - if there is no consent then this will probably be apparent authority. The common law doctrine of ostensible authority is now expressed in s 129(2)(b), (3)(b) (see below).

Persons who can make corporate representations

Only certain people/organs can make a binding representation as to who has ostensible authority:

  • The board - clearest case of a representation being made by a company
  • Sole director of a proprietary company - If proprietary company has only one director, that director can make representation
  • Representation can be made by members
    • Representation binding a company can also come from members in situations where they are not using management powers of board/sole director - this can happen where no directors are appointed but members represent that certain persons can act as directors: Mahony v East Holyford Mining Co, in which the secretary gave the contractor notice setting out passing of resolution which sought to appoint certain persons as directors but no valid resolution had been passed.
    • Freeman v Lockyer per Diplock J: conduct of majority of initial shareholders in acquiescing in assumption by new holders of position of directors was representation that they were properly appointed without recourse to representation about agency - under the doctrine of unanimous assent or the Duomatic rule where members give informed consent to a transaction entered into by the company, the company can be bound.
  • A person with actual authority
    • Representation can also be made by person having actual authority delegated from the board whether given expressly or impliedly ie, Brick and Pipe in which G was able to make representation binding B&P. G had implied actual authority to make representation (F did not however).
  • There can be cases where only representation appearing to 3rd party is made by person whose authority is in question - if it later appears that board had by acquiescence in earlier transactions given implied actual authority, that authority may extend to making representations as to authority: HH and Crabtree-Vickers
  • Representation of authority cannot be made by person who only has apparent authority: Crabtree-Vickers.

This was discussed in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (per Diplock LJ):[3]

  • A corporation is often limited by its constitution from delegating certain powers to a particular agent. In such instances, a representation of ostensible authority cannot be relied upon by an outsider to estop the corporation, since the corporation had no such power in the first place.
  • In order to create estoppel between the corporation and the contractor, the representation as to the authority of the agent which creates his ‘apparent’ authority must be made by some person or persons who have actual authority from the corporation to make the representation - this authority can be conferred in the constitution upon the board of directors, those with the powers of management
  • Four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so:
    1. That a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor
    2. That such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates
    3. That he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and
    4. That under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agen - Note: This has been eroded by statute.
  • Four conditions were satisfied in this case - K had apparent authority.

And also in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd:[4]

  • Facts: CV sued ADMA for damages for breach of contract arising from alleged sale of printing machine to ADMA. Contract alleged to be in writing and consisted of ADMA’s printed order form requesting CV to supply machine for stated price. Order form, which was acceptance of earlier written offer made by CV, was headed with ADMA’s name and at bottom bore printed signature of Bruce McWilliam followed by word ‘per’ and line for written signature.
    • Bruce was described as a ‘Public Officer’ on form - form was filled in and signed after word ‘per’ by Peter McWilliam.
    • Bruce Junior was managing director of ADMA - father Bruce Senior was chair of directors
    • Peter, other son, had previously been a director until his bankruptcy - other directors were wives of the two Bruces.
    • Supreme Court of Vic found Peter had no actual authority to make contract on behalf of ADMA. Such authority rested with the board, or at least with 3 men of the family and that no one alone had actual authority to make decision without concurrence of father. Found it impossible that a director, with no designated appointment, but acting as one of 3 principle executives of company could have inherent authority to purchase machine - also said he did not have the ostensible authority.
  • Held: “A person with no actual authority, but only ostensible, authority to do an act or make a representation cannot make a representation which may be relied on as giving a further agent an ostensible authority” - Bruce junior did not give actual authority to Peter as he himself was only exercising his ostensible authority as Managing Director (question: don’t managing directors have implied actual authority?)
    • Because Bruce junior had no authority, the only other question is whether the board gave Peter authority
    • Bruce senior, who was the real executive decider, made no representation that Peter had authority to enter into such a contract. Appeal dismissed

Indoor management rule

Persons dealing with a company in good faith should be able to assume that acts within its constitution and powers have been properly and duly performed and should not be bound to inquire whether acts of internal management have been validly executed. This is given legal force through the indoor management rule.

  • It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims
  • Not applicable when:
    • Person is aware of irregularities
    • Persons 'put on inquiry' - ie, if there was something to make a reasonable person in the position of the person suspicious about a possible regularity, and investigate the matter further.
  • The rule cannot benefit the company.

Ss 128 and 129 are the statutory equivalent with the indoor management rule.

Originally, the rule was not recognised. Cases such as Ernest v Nicholls said the opposite:[5]

  • All persons must take notice of the deed and the provisions of the Act - if they do not chose to acquaint themselves with the powers of the directors, it is their own fault and if the give credit to an unauthorised person they must be contended to look to them only, and not to the company at large.

The rule became more recognised in Royal British Bank v Turquand:[6]

  • Facts: RBB lent money to T (company) on security of bond signed by two directors and bearing company seal. Company’s deed of settlement authorised directors to grant bonds only when authorised by resolution of general meeting of company. Company pleaded that there had been no such resolution, so the transaction should be voided.
  • Held (Jervis CJ): parties dealing with companies are bound to read the statute and the deed of settlement, but are bound to do nothing more. Finding that authority might be made complete by resolution, he would have right to infer fact of such as resolution authorising that which on face of document appeared to be legitimately done - people dealing with a company have constructive notice of requirements of its memorandum and articles of association but are not to be affected by irregularities which take place in internal management of company.
    • Note: constructive notice is now abolished in relation to company documents:ss 130, 129(1)

Cases like Northside Developments Pty Ltd v Registrar-General show the operation of the rule today:[7]

  • Facts: ND incorporated so it could hold land. Mortgage supposedly made over the land by ND under its common seal to Barclays to secure the payment of principle and interest under a loan made to B to 1+ companies owned and controlled by RS, a director of ND. ND had no interest in any of their companies.
    • The mortgage was registered and following default B sold the land by auction to a 3rd party who then became the registered proprietor. ND sued to RG for damages under s 127 of the Act by way of compensation for loss of its estate and interest in the land on the grounds that it did not execute the mortgage documents.
    • Section 127 allows a person who sustains loss or damages by registration of any person as proprietor of land, who is prevented by Act from bringing proceedings for possession/recovery, to bring action against Registrar General as nominal defendant for recovery of damages.
    • Articles of association of ND said that seal must be kept safely and should be used in the presence of directors with their approval and should be countersigned by secretary and director
    • GS (son of RS) is supposedly the secretary in this case.
  • Held (Mason CJ): the rule in Turquand’s case is that a person dealing with a company in good faith may assume that acts within its constitution and powers have been duly performed and that person is not bound to inquire whether acts of internal management have been regular. The ambit of the operation of the rule is to be ascertained by reference to the actual or ostensible authority of the agent who purports to act on behalf of the company.
    • Account must be taken of the company’s constitution - if the agent cannot exercise the relevant authority under the constitution, his act cannot bind the company.
    • Affixing the company’s seal is a corporate act, having similar effect to a signature by an individual
    • If the person dealing with the company receives documents to which the seal as has been affixed in the presence of individuals designated in the articles of association, he is entitled to rely on its validity: County Life Assurance Co (1870)
    • If the nature of the transaction excites a reasonable apprehension that the transaction is entered into for purposes apparently unrelated to the company’s business, it will put the person dealing with the company upon inquiry. Whether this arises depends on the circumstances of the particular case.
    • Barclays were on inquiry - no evidence that anyone having authority to make the representation represented that the mortgage was valid.
  • Dawson J (with Toohey, Brennan and Guadron JJ):
    • The indoor management rule does not apply where there are suspicious circumstances sufficient to place a person dealing with the company upon inquiry and it is said that it does not apply where a document sealed or signed on behalf of the company is a forgery.
    • The correct view is that the indoor management rule cannot be used to create authority where non otherwise exists - it merely entitled an outsider, in the absence of anything putting him on inquiry, to presume regularity in the internal affairs of a company when confronted by a person apparently acting with the authority of the company
    • There must be something more than the mere existence of a power within the articles (eg, to delegate) to base an apparent exercise of authority which will bind the company - knowledge of such an article is not essential for the application of the indoor management rule where apparent authority can be established without reliance upon it.
    • Forgery can exist in two situations:
      • Narrow, when the seal is a counterfeit
      • Wide sense, where the document seems to have the actual seal and they are genuine signatures but the transaction itself hasn’t been authorised
    • The document will be a forgery even if the person concerned would, were the transaction one which he had authority to conclude on behalf of the company, be a person authorised to carry out the physical affixation of the seal
    • An ordinary individual director of the company does not have any ostensible authority to bind the company - directors can only act collectively as a board and the function of an individual director is to participate in decisions of the board
    • ND did not give any authority to complete the transaction - forgery. Barclays were on inquiry.

The statutory assumptions

The common law ideas regarding the assumptions of outsiders are restated in the Corporation Act (but with substantial modifications). Whilst the coverage of these provisions overlap with that of the general law doctrines, they are not identical in their coverage and effect, and do not displace the operation of those doctrines where they are not expressed in the statutory rules. The provisions contain a series of assumptions that a person dealing with a company is entitled to make.

The statutory provisions cab be summarised as follows:

  • s 128 - entitlement to make assumptions:
    • (1) & (2) - the effect of these sections is to prevent a company from escaping liability by arguing that certain formalities were not complied with.
    • (3) - states that a person is entitled to make assumptions as outlined in s 129 in relation to dealings with the company even if fraud on part of company, its officer or agent has occurred.
    • (4) - they are not, however, allowed to make such an assumption if at the time of dealings they knew or suspected the assumption was incorrect.
    • Note: The onus of proof lies on the party seeking to disentitle the reliance on the assumption: Sofyer v Earlmaze Pty Ltd.[8]
  • S 129 - Assumptions that can be made under s 128:
    • (1) Constitution and replaceable rules are complied with
      • Apparently intended to restate the indoor management rule - not under common law anymore
      • About ostensible/apparent authority
    • (2) Person appearing as director or company secretary has been duly appointed and has authority to exercise powers and perform duties normally exercised by director or secretary of similar company
      • Note: Under ss 205A, 205B, Ch 2N ASIC must be updated in regard to retirement or resignation of a director or secretary, or any changes within 28 days and the company must update annually publicly available info held for it by ASIC
      • Accordingly, this section provides a strong incentive upon companies to update this info with ASIC as 3rd party contractors may invoke the protection of the assumption in relation to its dealings purportedly made on the company’s behalf by former directors and secretaries who continue to be shown as holding office
      • Can be used with s 127(1)
    • (3) Person held out by the company as an officer or agent of company has been duly appointed and has authority to exercise similar powers and perform duties normally exercised by that kind of officer or agent of a similar company
      • Four conditions for apparent authority as stated in Freeman v Lockyer are relevant for determining whether the company has “held out” a person for purposes of this section.
    • (4) Proper performance of duties to comapny by offer/agent of company.
      • This assumption restates the common law presumption of regular and proper performance of director’s acts: Richard Brady Franks Ltd v Price (1937).
    • (5) Documents duly executed without seal if signed in accordance with s 127(1).
    • (6) Document duly executed with the seal if appears to have been affixed in accordance with s 127(2) and witnessed in accordance with that subsection and that anyone who does witness and signs and states that they are sole director/sole secretary do occupy both offices.
    • (7) Officer/agent with authority to warrant that doc is genuine/true copy.
  • s 130: ASIC – not constructive notice:
    • This section outlines that information available to the public from ASIC does not constitute constructive notice - thus the common law doctrine of constructive notice of registered company documents is abolished except for documents relating to a registerable charge given by a company (the registration of company charges is dealt with in Ch 2K CA).

This was discussed in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd:[9]

  • Facts: A deed was executed under seal of B&P to company O. The seal was attested by two directors, Goldberg (managing director) and Furst, with the latter saying he was the secretary as the companies constitution required it to be attested to by a director and the secretary. The other directors did not know about the transaction.
    • O was aware Furst was not the secretary on ASICs records, but was verbally assured, in presence of Furst and Goldberg by Durlacher (financial controller of the group) that he had been recently appointed. B&P sought declaration saying it was not bound as it was an irregular execution. Primary judge said O was entitled under s 129(6) to assume it was validly sealed, and B&P appealed.
  • Held: Goldberg's acquiescence (even though it was mere silence) to Durlacher's representation that Furst was the secretary meant that Furst has been 'held out' by B&P to be its secretary, so as to entitle O to make the assumption permitted by s 129(3).
    • The appellants tried to rely on the finding in HH (that a person with only ostensible authority to do an act or make representation cannot make a representation which may be relied on as giving another agent ostensible authority to do that act) but court said Goldberg was in effect (or with implied actual authority by reason of acquiescence) a MD who did have such authority.
    • Held that primary judge was correct in deciding O was entitled to make the assumption referred to in s 129(6).

And also in Story v Advance Bank Australia Ltd :[10]

  • Facts: Fleetwood Star was a family company whose sole shareholders and directors were Mr and Mrs Star. Company owned the family home - a mortgage executed by company over home for loan by bank to Mr Star personally. Security docs had company seal and signatures of both Mr and Mrs Star but Mr Star had signed his wife’s name without her knowledge.
    • There was no meeting of directors to authorise mortgage. Mrs Star challenged validity of mortgage (at same time they were getting divorced in Family Court). Trial judge found Mr Star had no intention to defraud his wife or the bank and that if she knew at the time, she would have signed, it was just easier for him to sign for her. Solicitor of bank said his search found them both as directors and assumed that they were signing in that capacity.
  • Held: the bank was having dealings with the company (which means it comes under s 128). s 128(3) extends to a forged document, which includes purported dealings, not just actual dealings. Since the Bank had no actual knowledge of the forgery, it was able to rely on the assumptions.

And also in Bank of New Zealand v Fiberi Pty Ltd:[11]

  • “Ought to know” in s 128(4) means that the person in question would reasonably be expected, in the particular circumstances of that person in relation to the assumption being made, to know the true position about the matter assumed
  • Requires the court to assess what the person in the particular situation acting responsibly would have known, whereas the concept of ‘put on inquiry’ involves the court asking were there features of the particular situation which required the person in question to make further inquiries

Validation of directors’ acts under defective appointment

An act done by a director or secretary is effective even if their appointment and its continuance is invalid because the director did not comply with the companies constitution or the Act: s 201M, 204E.

  • Validates acts but not the defective appointment itself
  • The act in question must have been done before discovery of the fact that there is a defect and the person relying on the section must have acted in good faith and not have been put on inquiry
  • This section cannot be invoked if there has been no purported appointment at all:Morriss v Kanssen
  • The provisions do not deal with the question whether an effective act by a director binds the company in its dealings with other people or makes the company liable to another person: s 201M(2), 204E(2).
  • These questions are decided by reference to ss 128 and 129 and the general law.

End

This is the end of this topic. Click here to go back to the main subject page for Business Associations.

References

Textbook refers to Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC.

  1. [1964] 2 QB 480.
  2. [1968] 1 QB 549.
  3. [1964] 2 QB 480.
  4. (1975) 133 CLR 72.
  5. (1857) 10 ER 1351.
  6. (1856) 119 ER 886.
  7. (1990) 170 CLR 146.
  8. [2000] NSWSC 1068.
  9. (1991) 6 ACSR 464.
  10. (1993) 31 NSWLR 722.
  11. (1994) 12 ACLC 48.
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